Whether you’re looking to capitalize on the push for consolidation that’s currently taking place in the physical therapy industry—and you have a potential buyer or two nipping at your heels—or you simply want to make sure your clinic is running as it should be, you must get comfortable taking your practice’s financial temperature. After all, how else will those potential buyers know the quality of the business they’re purchasing? How else will you know that your practice can not only survive another year, but also thrive? In short, you’ve got to have an idea of how you’re faring financially now in order to make things better tomorrow. With that in mind, here’s how to assess your practice’s financial health:
1. Identify your metrics.
There’s a myriad of potential metrics to choose from when it comes to measuring the financial health of your practice. In fact, we’ve published several lengthy articles on metrics alone, including this one, this one, this one, and this one. Below, you’ll find several of our favorite financial health metrics that we’ve covered over the years as well as some that we’ve adapted from this article:
- Days in A/R: The number of days it takes for you to get paid.
- Date of Service vs. Date of Charge: The time it takes for your staff to enter a charge into your billing system.
- Expected vs. Actual Collections: Payment you expect to receive compared to what you actually receive.
- Unreconciled Visits: The number of services that are never billed.
- Copay Collection Percentage: The percentage of patient copays you’re able to collect on the date of service.
- First-Pass Claim Acceptance Rate: The number of billed services you receive payment for on the first pass divided by those you don’t.
- Percent of Receivables Over 120 Days: The percentage of charges that have been unpaid for more than four months.
- Net Collection Rate: Your payments divided by your charges for a specific time frame.
- Denial and Rejection Rates: The percentage of claims payers deny and reject.
Income, Revenue, and Expense Metrics
- Customer Acquisition Cost: The total dollar amount you spend in a month on advertising divided by the number of new patients you receive.
- Net Income: The money you have left after paying operating and overhead expenses.
- Net Revenue per Month: The average amount of money you collect per month (after deducting the cost of providing your services).
- Gross Margin: The money you have left after paying for the cost of providing your services.
- Net Revenue per Visit: The average amount of money you collect per visit (after deducting the cost of providing your services).
- Revenue per Square Foot: Your total annual revenue divided by your clinic’s square footage (shows how efficiently you’re using your office space).
- Payer Revenue per Patient: The average amount of money you collect per patient for each of your top payers.
- Revenue per Therapist: The average revenue each therapist brings in for each visit, day, and month.
While productivity-related metrics may not seem as relevant to your practice’s financial health as some of the others listed above, I assure you they are. After all, when your therapists are productive—and effective—it has a direct effect on your bottom line. With that in mind, you could track:
- The number of service units your therapists are billing per hour.
- The total—and average—number of new patients each therapist brings in each month.
- The average number of visits per patient case, per therapist.
If you’re looking to sell your practice, you may also want to calculate your payment-per-RVU (relative value unit) by dividing collected payments by the number of RVUs charged. As this article explains, this can often be a more robust metric than collection ratios, because potential buyers can compare payment-per-RVU across clinics to evaluate provider productivity. In the same article, John Boland—consultant and VP of MedSynergies, Inc.—said, “A group where [providers] on average are getting paid $40 per RVU is doing better than one where [providers] are paid $30 per RVU.” Furthermore, “the payment-per-RVU gives you an indication of a financial trend over time, in terms of how much [providers] are earning, what services they’re providing and how well those services are being reimbursed.”
2. Develop a plan.
Once you’ve decided which metrics you’d like to use to assess the financial health of your practice—and you’ve taken a baseline measurement to understand where your clinic stands currently—you’ll also want to develop a plan for continuing to monitor those metrics on a regular and consistent basis. As WebPT President Heidi Jannenga explains in this Founder Letter, no matter what mechanism you establish for measuring and tracking your data, it’s crucial that [it] allows for consistent data collection—in terms of both the people you’re measuring and the frequency at which you measure. As Barbie Thomas—the author of this article—points out, daily, weekly, and monthly monitoring each provide a different level of purview into the health of your practice:
Thomas writes that daily monitoring can help “you keep an eye on your practice’s cash flow.” That’s because “cash flow projections updated for daily receipts and disbursements provide essential information that will help you manage cash needs.” To that end, she says, “your staff should be able to calculate daily totals and percentages for cash received at the time of service.” We’ve been discussing the importance of collecting patient payment at the time of service a lot over the past few months, and that’s because it’s imperative to the success of your practice. According to Thomas, “setting goals and daily monitoring will motivate your staff to collect as much as possible at the time of service, when it’s least costly to collect.”
Per Thomas, “dips in production usually result in dips in collections,” which is why, “by monitoring charges, payments and adjustments each week, you’ll be in a better position to know your short-term cash flow.” Thomas also suggests reviewing patient payment statuses each week to ensure you can “make timely decisions regarding their write-off or placement with a collection agency.”
In addition to comparing your year-to-date income statement against last-year’s in order to spot—and reverse—any downward trends, Thomas suggests that providers review their accounts receivable aging report and follow up on any accounts that are over 60 days.
3. Set a goal, make changes, and measure again.
There’s a good chance your clinic won’t be performing as well as you’d like it to in at least one of the areas you’ve chosen to measure—and that’s okay. Now you know, which means you can set a goal, implement process changes, and measure again. Let’s say you learn that your copay collection percentage is abysmal. In fact, you’re only collecting about 30% of patient copays at the time of service, which means you’re devoting valuable time and resources to contacting patients after they leave your office in an attempt to collect what you’re owed. Not only is that significantly less effective than collecting at the time of service, but it’s also a drain on your staff—and your bottom line. That’s why you’ll want to get that number up to at least 90% (as we recommended here) within six months. Here are a few ideas on how to get there:
- Educate your front-office staff on the importance of collecting copays while the patient is in your office.
- Provide additional training resources to help your staff have potentially challenging conversations with patients.
- Institute an incentive program to encourage your staff members to improve their collection rates.
- Rewrite your patient payment policy to make it clear to patients that payment is due at the time of service.
Over the six months that follow, you can monitor the effect the changes you’ve implemented are having on your copay collection percentage. If your percentage is climbing quickly, wonderful. If not, you may want to shadow your front office staff to identify the problem. Then, implement some new changes and measure again.
While assessing the financial health of your practice may start out fairly simple—select your metrics and start measuring—adjusting your processes in order to make improvements is anything but. In fact, it may very well require some trial and error as you identify areas where your clinic’s temperature is either too high or too low—and then implement new best practices to bring it into the optimal range. Just make sure that you’re documenting everything, so you can map cause and effect.
How do you asses the financial health of your practice? Tell us what works for you—and what doesn’t—in the comment section below.